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The long-anticipated launch of the Bakkt exchange has been delayed twice, with the latter part of 2019 now its expected inauguration, but the reasons for the current delay has escaped everyone in the crypto community because neither the management of the Bakkt exchange nor the folks over at the Commodity Futures Trading Commission (CFTC) have been forthcoming on the matters at hand. The Bakkt platform “will allow institutional customers to perform various operations with digital assets as part of a seamless global network”. Bitcoin futures contracts that settle in kind will be one product.

As was reported back in December:

The mastermind behind Bakkt is none other than Jeff Sprecher, head of the Intercontinental Exchange (ICE), the world’s premier stock exchange operator. Sprecher’s spouse, Kelly Loeffler, will be the project’s CEO. She is currently the head of ICE’s digital assets department. Bakkt will immediately bring to the effort an assortment of “Big Players” in the field of emerging consumer Fintech, like BCG, Starbucks, and Microsoft.

In other words, Bakkt is to be a “leading edge” crypto exchange, the only one of its kind, with all the bells and whistles that will satisfy institutional players and regulators, alike. As reported:

Bakkt will also integrate consumer and institutional applications in a seamless, regulated manner, thereby providing the transparency and trust expected by both groups. Bitcoin futures with custodian services will also be part of the first phase of operations, subject to the approval of the Commodity Futures Trading Commission.

The CFTC approval seems to be the current stumbling block, but supposedly not for the same reasons that the SEC has cited when it has denied Bitcoin ETF applications in the past. The current news is that reporters at CoinDesk recently interviewed and parsed the words of the CFTC chairman, J. Christopher Giancarlo, a noted friend of the crypto community, who has been given the affectionate name of “CryptoDad”. In early 2018, he “became a hero to the crypto community after advocating for a “do no harm” approach to regulating the space before Congress.”

The uniqueness of the Bakkt concept is that it will settle Bitcoin futures contracts in kind, not in cash as with the CBOE or the CME. Institutional investors actively use derivatives like these to hedge their positions in a commodities market, but there have to be other intermediaries that warehouse the commodity and clearinghouses that provide the infrastructure to make the process work. Rules and accepted protocols have evolved over the past one hundred years or more and have been codified within the law.

According to Giancarlo:

The deal that was struck was there’d be federal oversight of the exchanges, derivatives products, certain intermediaries, and the clearinghouses but the entities that actually held custody of financial instruments, like cash, were usually regulated as banks or trusts under state law or a national charter. Even when we have a CFTC-regulated clearinghouse, the clearinghouse uses state-regulated custodians or a nationally chartered, OCC-regulated bank for the actual holding of the funds and securities.

ICE, however, is not a bank or state-regulated custodian. As a result, Bakkt “is now seeking a license from New York state (presumably for a trust company) so it can handle custody.”

There is one more issue that has to do with clearinghouses, a necessary intermediary in the derivatives markets that deals directly with buyers and sellers. The issue revolves around the sharing of risk and price volatility among its member firms. Giancarlo explains:

A potential challenge here, and as we saw with bitcoin futures, is that the other asset class participants in the clearinghouse don’t always want the exposure to mutualize their risk on their interest rate or commodity futures with somebody else’s cryptocurrency holdings.

ICE does have its own clearinghouse, ICE Clear US, but only one opinion, that of a pro-crypto supporter, Bob Fitzsimmons, an executive vice president with Wedbush Securities, has been shared publicly:

Our understanding in this process is we would not be handling any of the cash bitcoin or the spot bitcoin or the spot digital currency, so there’s no need for us to have the holding or the handling of it, which is one of the things that scares people. In terms of the futures side, we’re very comfortable.

Bakkt is not the only company wanting to list Bitcoin futures contracts that settle in kind. The startup, ErisX, along with its other competitor exchanges, Seed CX and LedgerX, has designs to pursue the same institutional market. For existing companies, a more simplified certification process will satisfy the CFTC, rather than a formal product approval regimen. The problem here: Since “Bakkt wanted to use its own warehouse to custody bitcoin, it did not follow this self-certification path”.

Juthica Chou, the COO for LedgerX, explains that:

The company has a DCO license. In other words, it operates its own clearinghouse.” As a result: “LedgerX deals directly with our participants, we have no intermediaries. Ironically, the model that cuts out the intermediaries is the safest model. Too many established Wall Street firms are used to dealing exclusively with intermediaries.

With all this having been said, Bakkt continues to hire top-line executives, recruit other development and management staff, and build out is platform. The timing of its launch, however, is still dependent upon the CFTC, which must tie up and be satisfied with every last detail. As with the old adage, the devil is in the detail, and as Giancarlo concludes:

It’s often a fine detail in one protocol or another that makes all the difference.

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